Bitcoin-like financial system founder indicted for money-laundering

The founder of Liberty Reserve, a digital currency system, has been indicted along with six others on charges of laundering over $6 billion, as countries around the world grapple with the rise of digital currencies that extend beyond their control.

Liberty Reserve was incorporated in Costa Rica in 2006 and had at least 200,000 customers in the U.S., but failed to register in the U.S. as a money-transmitting service, according to Wired. Though the service did have members that made legal transactions, authorities said Liberty Reserve had become a financial hub for international criminals to deal everything from drugs to child pornography.

The founder, Arthur Budovsky, had been arrested before and claimed to have shut down the website, but continued to run it. LibertyReserve.com went offline on Monday (see above). The company processed an estimated 55 million financial transactions and is thought to have laundered “more than $6 billion in criminal proceeds,” prosecutors said in the indictment.

Government regulation of digital currencies (many prefer the term “math-based currency”) has been tricky and will only get more-so, even when they’re used to pay for perfectly legal goods. Proponents see digital currencies as a solution for businesses in countries with weak or volatile currencies looking to transact around the globe — bypassing cumbersome and often graft-happy bureaucracies.

How exactly digital currencies work — not to be confused with digital transactions facilitated by companies like PayPal — varies from currency to currency. Transactions can be anonymous and are encoded through cryptological puzzles so deciphering the exact financial ledger of these monetary systems — especially as they increase in transaction volume — is very difficult, though it is possible. Both the FTC and SEC are still grappling with how exactly to define and regulate their increasing usage.

Digital currencies have been the pipe dream of hackers and cryptologists for decades, and have been targeted by law enforcement before. Federal agents raided the offices of Gold and Silver Reserve, a Florida-based company considered the premier digital currency, in 2005.

Yet only recently have they gained mainstream attention. Bitcoin has been the most widely recognized, especially last month when it experienced a “flash-crash” in its value. Today it is trading at a rate of around $130 per bitcoin.

Bitcoin uses the combination of two cryptological “keys” to consummate a transaction; their combination is validated by the (typically anonymous) community and the transaction is logged. This decentralizes the idea of a “bank” — the community manages all transactions, rather than a central institution. That shift has caught the eye of libertarians, concerned about wreckless big banks or encroaching government regulation.